10-Q 1 t10q701.txt FORM 10Q JULY 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------- Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-12938 Interstate National Dealer Services, Inc. (Exact name of registrant as specified in its charter) Delaware 11-3078398 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 333 Earle Ovington Blvd., Mitchel Field, NY 11553 (Address of principal executive offices) (516) 228-8600 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of September 13, 2001, Registrant had issued and outstanding 3,967,449 shares of Common Stock. 1 INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Page Number PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of July 31, 2001 and October 31, 2000 3 Consolidated Statements of Operations for the nine and three month periods ended July 31, 2001 and 2000 4 Consolidated Statement of Stockholders' Equity and Comprehensive Income for the nine month period ended July 31, 2001 5 Consolidated Statements of Cash Flows for the nine month periods ended July 31, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Qualitative and Quantitative Disclosures of Market Risk 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings 11 Item 6. Exhibits and Reports on Form 8-K 11 2 INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS July October 31, 31, 2001 2000 ----- ---- Unaudited ASSETS CURRENT ASSETS: Cash and cash equivalents $ 17,062,812 $ 17,432,848 United States Treasury Bills, at cost 2,273,502 3,994,290 Accounts receivable, net 7,133,056 6,949,052 Prepaid expenses 391,020 643,971 ---------- --------- Total current assets 26,860,390 29,020,161 MARKETABLE SECURITIES 40,677,908 34,927,698 RESTRICTED CASH 11,930,047 8,951,105 FURNITURE, FIXTURES AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $2,305,640 and $1,906,110, respectively 1,081,005 1,440,152 INTANGIBLE ASSETS, less accumulated amortization of $179,167 and $171,667, respectively 45,833 53,333 DEFERRED INCOME TAXES 4,324,403 3,732,001 NOTE FROM RELATED PARTY 20,000 45,000 OTHER ASSETS 1,642,796 1,615,478 --------- --------- $ 86,582,382 $ 79,784,928 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 4,660,404 $ 5,258,874 Accrued expenses 683,194 615,774 Accrued commissions 1,335,452 1,178,561 Reserve for claims 2,476,485 3,082,260 Other liabilities 741,714 374,698 ---------- ----------- Total current liabilities 9,897,249 10,510,167 DEFERRED CONTRACT REVENUE 53,169,112 45,993,786 CONTINGENCY PAYABLE 2,120,759 2,480,408 ---------- ---------- Total liabilities 65,187,120 58,984,361 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 1,000,000, shares authorized; no issued shares - - Common stock, $.01 par value; 10,000,000 shares authorized; 4,698,449 shares issued and 3,967,449 and 4,254,749 shares outstanding, respectively 46,985 46,985 Additional paid-in-capital 11,226,786 11,226,786 Retained earnings 13,676,309 11,846,574 Accumulated other comprehensive income (loss) 294,570 (34,393) Less: Treasury stock, at cost (731,000 and 443,700 shares, respectively) (3,849,388) (2,285,385) ------------- ----------- Total stockholders' equity 21,395,262 20,800,567 ------------- ------------- $ 86,582,382 $ 79,784,928 The accompanying notes to financial statements are an integral part of these consolidated balance sheets. 3 INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED

The accompanying notes to financial statements are an integral part of these consolidated statements. 4 INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED JULY 31, 2001 UNAUDITED

The accompanying notes to financial statements are an integral part of these consolidated statements. 5 INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 31, 2001 AND 2000 UNAUDITED 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations $1,829,735 $2,232,018 Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: Depreciation and amortization 407,030 428,951 Deferred income taxes (592,402) (704,931) Increase in cash resulting from changes in operating assets and liabilities: Accounts receivable (184,004) (290,887) Prepaid expenses 252,951 (193,463) Restricted cash (2,978,942) (3,361,717) Other assets (27,318) (423,861) Accounts payable (598,470) (25,939) Accrued expenses 67,420 (438,333) Accrued commissions 156,891 253,888 Reserve for claims (605,775) 880,070 Other liabilities 367,016 (33,543) Deferred contract revenue 7,175,326 8,687,218 Contingency payable (359,649) 86,626 ---------- ---------- Net cash provided by operating activities of continuing operations 4,909,809 7,096,097 ---------- --------- Net cash used in operating activities of discontinued operations - (578,821) --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net sales of United States Treasury Bills 1,720,788 13,601,895 Net purchases of marketable securities (5,421,247) (31,092,890) Purchase of furniture, fixtures, and equipment (40,383) (282,515) Note from related party 25,000 25,000 -------- -------- Net cash used in investing activities (3,715,842) (17,748,510) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock (1,564,003) (1,618,704) Proceeds from exercise of stock options - 68,278 --------- -------- Net cash used in financing activities (1,564,003) (1,550,426) --------- ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS (370,036) (12,781,660) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,432,848 30,145,855 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $17,062,812 $17,364,195 =========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Income taxes $1,613,505 $ 1,675,618 ========== ========= The accompanying notes to financial statements are an integral part of these consolidated statements. 6 INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000. 2. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of July 31, 2001, and the consolidated results of operations and cash flows for the periods ended July 31, 2001 and 2000. The accounting policies followed by the Company are set forth in the Company's consolidated financial statements included in the Annual Report mentioned above. 3. The consolidated results of operations for the nine and three month periods ended July 31, 2001 and 2000 are not necessarily indicative of the results to be expected for the full year. 4. The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic net income per share ("Basic EPS") is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share ("Diluted EPS") is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents then outstanding. SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face of the statements of operations. A reconciliation between the numerators and denominators of Basic and Diluted EPS is as follows: Net Income Shares Per Share For the nine months ended July 31, 2001 Basic EPS Net income attributable to common shares $1,829,735 4,140,494 $.44 Effect of dilutive securities: stock options - 176,054 (.02) -------- --------- --- Diluted EPS Net income attributable to common shares and assumed option exercises $1,829,735 4,316,548 $.42 ======== ========= ==== For the nine months ended July 31, 2000 Basic EPS Net income attributable to common shares $1,428,772 4,604,280 $.31 Effect of dilutive securities: stock options - 181,021 (.01) -------- --------- ----- Diluted EPS Net income attributable to common shares and assumed option exercises $1,428,772 4,785,301 $.30 ========= ========= ===== 7 Net Income Shares Per Share For the three months ended July 31, 2001 Basic EPS Net income attributable to common shares $639,861 4,055,877 $.16 Effect of dilutive securities: stock options - 169,908 (.01) -------- --------- --- Diluted EPS Net income attributable to common shares and assumed option exercises $639,861 4,225,785 $.15 ======== ========= ==== For the three months ended July 31, 2000 Basic EPS Net income attributable to common shares $532,486 4,458,829 $.12 Effect of dilutive securities: stock options - 151,941 (.01) -------- --------- ----- Diluted EPS Net income attributable to common shares and assumed option exercises $532,486 4,610,770 $.11 ======== ========= ===== 5. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No.142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS No.142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt SFAS No.142 effective November 1, 2002, with early adoption permitted. The Company believes that the adoption of the provisions of SFAS No.142 that are effective November 1, 2002 will not have a material effect on its results of operations and financial position. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations For the Nine Months ended July 31, 2001 compared to the Nine Months ended July 31, 2000 Revenues decreased by approximately $966,000, or 2%, to approximately $44,439,000 for the nine months ended July 31, 2001 as compared to approximately $45,405,000 for the nine months ended July 31, 2000. This decrease was primarily due to: (i) a decrease in administrative and insurance fees resulting from a decrease in the number of service contracts accepted for administration by the Company in fiscal 2001; partially offset by (ii) an increase in the recognition of deferred contract revenue as a result of an increase in the total number of unexpired service contracts under administration. Costs of services provided, which consist primarily of claims and cancellation costs, increased by approximately $442,000, or 2%, to approximately $24,588,000 for the nine months ended July 31, 2001, as compared to approximately $24,146,000 for the nine months ended July 31, 2000. As a percentage of revenues, cost of services provided increased to 55% for the nine months ended July 31, 2001 as compared to 53% for the same period in 2000. Claims and cancellation costs are directly affected by the total number of unexpired contracts under administration, which has increased on a yearly basis. 8 Gross margin decreased by approximately $1,408,000, or 7%, to approximately $19,851,000 for the nine months ended July 31, 2001, as compared to approximately $21,259,000 for the nine months ended July 31, 2000. This decrease is attributable to the decrease in revenues and the increase in costs of services provided as described above. Gross margin for the nine months ended July 31, 2001 was 45% as compared to 47% for the nine months ended July 31, 2000. Selling, general and administrative expenses increased by approximately $60,000, or 0.3%, to approximately $19,926,000 for the nine months ended July 31, 2001, as compared to approximately $19,866,000 for the nine months ended July 31, 2000. This increase was in large part due to: (i) increases in personnel, promotional, legal and banking costs; partially offset by (ii) decreased commissions paid as a result of decreased sales revenue. Selling, general and administrative expenses were 45% of revenues for the nine months ended July 31, 2001 as compared to 44% for the nine months ended July 31, 2000. Investment income increased by approximately $812,000, or 37%, to approximately $3,021,000 for the nine months ended July 31, 2001, as compared to approximately $2,209,000 for the same period in 2000. The increase is primarily a result of investment income generated by funds provided by operating activities in the twelve months ended July 31, 2001 and a shift of investments from one and two year United States Treasury Notes to longer term government securities which provide a greater yield. Income from continuing operations before provision for income taxes decreased by approximately $657,000, or 18%, to approximately $2,946,000 for the nine months ended July 31, 2001, as compared to approximately $3,603,000 for the same period in 2000. For the nine months ended July 31, 2001, the Company recorded a provision for income taxes on continuing operations of approximately $1,116,000, as compared to a provision for income taxes on continuing operations of approximately $1,371,000 in the same period in 2000. Income from continuing operations was approximately $1,830,000 for the nine months ended July 31, 2001, as compared to approximately $2,232,000 for the nine months ended July 31, 2000. Loss from discontinued operations net of taxes was approximately $803,000 for the nine months ended July 31, 2000. The loss from discontinued operations resulted from costs incurred by the Company's subsidiary, Uautobid.com, to develop and finance its car buying web site. In July 2000, after an extensive review and evaluation, the Company decided to abandon the operations of its Uautobid.com subsidiary. The Company determined that further investment in this operation was not prudent due to the higher level of risk associated with the rapidly changing and increasingly competitive internet car buying market. Net income for the nine months ended July 31, 2001 was approximately $1,830,000, as compared to approximately $1,429,000 for the same period in 2000. Diluted income per share from continuing operations for the nine months ended July 31, 2001 decreased by $.05 to $.42 per share, as compared to $.47 per share for the same period in 2000. Diluted net income per share for the nine months ended July 31, 2001 was $.42 as compared to diluted net income per share of $.30 for the same period in 2000. For the Three Months ended July 31, 2001 compared to the Three Months ended July 31, 2000 Revenues decreased by approximately $4,000, to approximately $16,822,000 for the three months ended July 31, 2001 as compared to approximately $16,826,000 for the three months ended July 31, 2000. During the current quarter there was a decrease in administrative and insurance fees resulting from a decrease in the number of service contracts accepted for administration by the Company in fiscal 2001 offset by an increase in the recognition of deferred contract revenue as a result of an increase in the total number of unexpired service contracts under administration. Costs of services provided, which consist primarily of claims and cancellation costs, increased by approximately $42,000, or 0.5%, to approximately $9,362,000 for the three months ended July 31, 2001, as compared to approximately $9,320,000 for the three months ended July 31, 2000. As a percentage of revenues, cost of services provided increased to 55.7% for the three months ended July 31, 2001 as compared to 55.4% for the same period in 2000. Gross margin decreased by approximately $46,000, or 0.6%, to approximately $7,460,000 for the three months ended July 31, 2001, as compared to approximately $7,506,000 for the three months ended July 31, 2000. This decrease is primarily attributable to the increase in costs of services as described above. Gross margin for the three months ended July 31, 2001 was 44.3% as compared to 44.6% for the three months ended July 31, 2000. 9 Selling, general and administrative expenses increased by approximately $261,000, or 4%, to approximately $7,286,000 for the three months ended July 31, 2001, compared to approximately $7,025,000 for the three months ended July 31, 2000. This increase was in large part due to: (i) increases in personnel, promotional, legal and banking costs; partially offset by (ii) decreased commissions paid as a result of decreased sales revenue. Selling, general and administrative expenses were 43.3% of revenues for the three months ended July 31, 2001 as compared to 41.7% for the three months ended July 31, 2000. Investment income was approximately $862,000 for the three months ended July 31, 2001, as compared to approximately $863,000 for the same period in 2000. Income from continuing operations before provision for income taxes decreased by approximately $308,000, or 23%, to approximately $1,036,000 for the three months ended July 31, 2001, as compared to approximately $1,344,000 for the same period in 2000. For the three months ended July 31, 2001, the Company recorded a provision for income taxes on continuing operations of approximately $396,000, as compared to a provision for income taxes on continuing operations of approximately $506,000 in the same period in 2000. Income from continuing operations was approximately $640,000 for the three months ended July 31, 2001, as compared to approximately $838,000 for the three months ended July 31, 2000. Loss from discontinued operations net of taxes was approximately $305,000 for the three months ended July 31, 2000. The loss from discontinued operations resulted from costs incurred by the Company's subsidiary, Uautobid.com, to develop and finance its car buying web site. In July 2000, after an extensive review and evaluation, the Company decided to abandon the operations of its Uautobid.com subsidiary. The Company determined that further investment in this operation was not prudent due to the higher level of risk associated with the rapidly changing and increasingly competitive internet car buying market. Net income for the three months ended July 31, 2001 was approximately $640,000, as compared to approximately $532,000 for the same period in 2000. Diluted income per share from continuing operations for the three months ended July 31, 2001 decreased by $.03 to $.15 per share, as compared to $.18 per share for the same period in 2000. Diluted net income per share for the three months ended July 31, 2001 was $.15 as compared to diluted net income per share of $.11 for the same period in 2000. Liquidity and Capital Resources Cash and cash equivalents, United States Treasury Bills, at cost, and marketable securities, which have maturities ranging between two to ten years, were approximately $60,014,000 at July 31, 2001, as compared to approximately $56,355,000 at October 31, 2000. The increase of approximately $3,659,000 was primarily the result of cash provided by the Company's operating activities partially offset by the purchase of treasury stock. During the fiscal year ended October 31, 1997, the Company entered into a $3,000,000 revolving credit facility with the Chase Manhattan Bank. Under the terms of the facility, advances bear interest at 1/2% above the prime rate and the Company is obligated to pay an annual facility fee of 1/2% of the total available amount. Outstanding amounts under the credit facility are secured by a pledge of all accounts receivable of the Company. As at July 31, 2001, no amounts had been borrowed under the credit facility. The Company believes that its current available cash and anticipated levels of internally generated funds will be sufficient to fund its financial requirements at least for the next fiscal year at the Company's present level of revenues and business activity. Forward-Looking Statements This Form 10-Q, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based on assumptions and expectations which may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial or otherwise, may differ from the results discussed in the forward-looking statements. A number of these risks and other factors that might cause differences, some of which could be material, along with additional discussion of forward-looking statements, are set forth in the Company's Report on Form 8-K filed with the Securities and Exchange Commission on December 23, 1996. 10 Item 3. Qualitative and Quantitative Disclosures of Market Risk The Company has historically invested its cash on hand in short and long term, fixed rate, highly rated and highly liquid instruments with maturities ranging between 1 and 6 years which were reinvested upon maturity. During this fiscal year, the Company has shifted its investment policy to invest more in longer term government securities with maturities ranging between 2 and 10 years, which provide a greater yield. Although the existing investments are not considered at risk with respect to changes in interest rates or markets for these instruments, the rate of return on investments could be affected at the time of reinvestment. The Company has not purchased future, forward, option or other derivative instruments to hedge against fluctuations in the prices of the investments it purchases. As a result, future investment purchases are subject to changes in the prices of such investments. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company and one of its subsidiaries are parties to several related proceedings arising out of the administration of service contracts marketed by CECO Management Corp. ("CECO"), a Texas based company operating under the name "Warranty Gold" and its successor. In April 2001, CECO filed an action for declaratory judgment against National Service Contract Insurance Company Risk Retention Group ("NSC"), the Company's insurance subsidiary, in the District Court of Travis County, Texas, seeking a determination that insurance policies issued by NSC will indemnify CECO for service contract claims in excess of reserve funds. That action has been removed to the United States District Court for the Western District of Texas, Austin Division. The Company moved to dismiss the case for improper venue or transfer it to the Eastern District of New York, and CECO moved to remand the case to state court. Both motions are pending. In May 2001, NSC brought a declaratory judgment action in the United States District Court for the Eastern District of New York seeking a determination that it has no liability to CECO for payment of service contract claims in excess of the reserve funds. At the same time, the Company brought an action against CECO in the United States District Court for the Eastern District of New York alleging that CECO breached its contract with the Company by selling service contracts through another administrator after March 1, 2000. In July 2001, CECO filed various counterclaims against the Company, alleging that the Company breached a contract with CECO, and other duties owed to CECO, and sought compensatory and punitive damages and injunctive relief. CECO has moved for an immediate injunction removing the Company as the administrator for service contracts sold by CECO before March 2000. That motion is pending. At this early stage of litigation, the company is not able to predict the outcome of the claims and counterclaims in these related actions. Item 6. Exhibits and Reports on Form 8-K -------------------------------- There were no reports on Form 8-K filed during the three months ended July 31, 2001. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. INTERSTATE NATIONAL DEALER SERVICES, INC. September 13, 2001 By: /s/Zvi D. Sprung ------------------ ---------------------------------- Date Zvi D. Sprung Chief Financial Officer 12

INTERSTATE NATIONAL DEALER SERVICES INC 10-Q